Larone: We’re burning money and shooting ourselves in the foot

TORONTO—So what the  hell happened in 2009?  That’s the question  David Larone, PKF director, Toronto, asked hoteliers and financiers at the annual PKF Consulting Inc. Outlook Forum held Oct. 8 at the Hyatt on King in Toronto.  PKF also held a Western conference at the Four Seasons Hotel Vancouver Oct. 6.

“It’s a major issue.  There’s a disconnect between hotel demand and the economy. GDP and RevPAR usually moved in tandem.”

But this year’s figures show that while Canada’s GDP is expected to shrink by 2.1 percent, the figures were far worse for the travel industry.  Domestic business overnight travel is expected to shrink by 6.2 percent, pleasure domestic pleasure travel by 4.2 percent, U.S. overnight travel by 5.3 percent and overseas overnight travel by 9.5 percent.

PKF’s figures also show that RevPAR is down to $73 from $83 in 2007 and 2008—a 12 percent decline.

Industry-led discounting is to blame, says Larone, who has constantly exhorted the industry to hold the line on rates.  We had started to regain some of the losses over the past decade, but have slipped dramatically last year.

“We know what we did—we’re burning money and shooting ourselves in the foot!”

When it comes to occupied room nights, the West actually got hit a little harder than Central Canada, said Fran Hohol, PKF director, Toronto.  The falloff in natural gas prices meant that drilling was curtailed. In some areas, this actually helped mitigate a potential hotel room supply problem.

Regional market outlooks

2009 occupancies should come in at 58 percent, the lowest level since 1993 other than SARS.

Nationally, net operating income has declined by 35 per cent, bringing levels from $11,800 last year back down to $7,800 per room, the same level they were in 1997.  

Regionally, net income per available room for Atlantic hotels declined by 22.3 per cent, Central region by a frightening 42.2 per cent and Western Canada by 29.3 per cent.

As Beth Walters, PKF director, Western Canada, noted:  “Five thousand dollars a room is everything for the operator.”

Brian Stanford of PKF Toronto noted that there were industry driven impacts. Four percent in lost demand has a $1.5 billion bottom line impact nationally, he said.  

On the other side of the coin, a $6 decrease in average daily rate (ADR) has a $500 million bottom line impact nationally.

“If rates were held in 2009, we could have absorbed another three to four million occupied room nights.

“Demand will come back, but we will not catch up.  This represents $15 per room for every hotel nationally.”

The outlook for next year shows net income per available room increasing by 5.0 percent in Atlantic Canada, 4.8 percent in Central Canada, and 2.8 per cent in the west.

Saskatchewan market looks to be relatively strong

The Saskatchewan market is relatively strong, Walters reported, with some new oil and potash activity.  Saskatoon will stand, Regina is a little off and other municipalities are up, she said.  

Manitoba, which is an institutional market, is holding steady.

In Alberta, some of the oil and gas projects have stalled, and some communities are in total shock.  Fort McMurray still has long-term strength, and this pause is actually a good time for the hotel infrastructure to catch up.

Victoria and Vancouver have lost some convention business, and corporate business is soft as is the international demand that affects Vancouver.

There is a lot of new supply in South Edmonton — the city is catching up on supply.

Central Canada lagging

On the supply side, Central Canada is going from bad to worse, said Stanford.

Ottawa is the city that has done the best job of avoiding the large amount of rate discounting.  Montreal is flat, and Halifax should have a modest recovery.

Toronto is down 19 per cent in terms of RevPAR, and $10 in ADR.  There has been an erosion in occupancy and the market is off about $20 from what was expected.

There are three good markets among the 20 PKF tracks.  One of these is St. John’s, NL, which has a RevPAR of plus 4 percent, and good long-term prospects due to expansion of the convention centre and oil and gas activity.  The other two markets are Kingston and North Bay, Ontario.

Where are we headed?

With all the negative news for 2009, the forecasts show that 2010 should be a very different year.   

For 2010, every province in the country is projecting a positive GDP growth rate, Hohol told the conference.  

In the travel segment, domestic business and pleasure overnight travellers continue to be the backbone of the industry, with projected increases of 4.5 and 3.0 percent anticipated next year.

U.S. overnight travel will show a modest improvement of 1.9 percent, although there is no way it will get back to historic levels.  The outlook for overseas overnight travel is also positive, and will be particularly helpful in Western Canada.

In terms of room supply, statistics show have had relatively modest growth in supply—about 1.5 per cent per year over the last five years, as opposed to the U.S. which had a growth rate of 5 per cent for each of the last five years.

In conclusion, said Larone, we don’t want to revisit 2009. We are in a much better position than the U.S.  And for 2010, we can look forward to decent growth in GDP and travel.